INSIDE: 2 • Economic Forecasts 3 • The USA Partriot Act
• The Proposed Check Creates New Duties
Truncation Act
Bankers Benefit from Electronic Distribution
M ore than 500 Eighth District customers
have taken advantage of the St. Louis
Fed’s new Electronic Distribution (ED)
service since it became available
in early January. The
following information now
is available electronically:
• changes to the federal funds
target and discount rates,
• regulatory information,
• operating circulars,
• cash and check services,
• Electronic Access Support,
• Electronic Payments,
• services directories and
holiday schedules,
• supervisory bulletins,
• bank holding company
(BHC) and bank application
press releases, and
• weekly BHC and bank applications—public
comment periods.
This new service will better serve District customers
because it delivers information in real time.
Fed Revises PSR Policy Statement
T he Federal Reserve Board
has revised its policy
statement on Payments System
Risk. Two key changes may
interest Eighth District
institutions: 1) Certain
depository institutions now can
pledge collateral to the Federal
Reserve so that they may gain
additional daylight overdraft
capacity in excess of their net
debit caps; 2) Starting April
2002, the posting time of
4 • Regional Roundup 5 • Why the Fed 6 • FedFacts
• Seasonal Credit Is Available Should Ignore the • Calendar/Events
for Community Banks Stock Market
SPRING 2002
News and Views for Eighth District Bankers
ED subscribers receive an e-mail notification that contains
a link, which allows them to view and print
the information from their computer screens.
ED subscribers should be
aware that account
management information and
messages sent via FedLine are
separate services. In addition,
the Bank will not distribute
any confidential information,
such as examination materials,
via ED.
We encourage customers
who do not have Internet
access to set up an account
with an Internet service
provider soon. Paper mailings
for ED materials will cease
Oct. 1, 2002.
For more information,
e-mail Tracie Mueller at emailalert@stls.frb.org or
call her at (314) 444-8810, or 1-800-333-0810 ext.
44-8810. A list of frequently asked questions also
can be found on our web site, www.stls.frb.org.
electronic check presentments
(ECP) will move to later in the
day, beginning at 1 p.m. local
Releases” section of the Federal
Reserve Board’s web site:
www.federalreserve.gov/
time. This change will minimize boarddocs/press/boardacts/2001/.
the disincentive posed by the If you would like a paper copy
earlier posting rules. It also will of this release, contact Tracie
reduce or eliminate the daylight Mueller at (314) 444-8810 or 1-
overdraft charge differential that 800-333-0810, ext. 44-8810. If
1
was created when customers you have questions regarding the
previously used ECP. Payments System Risk Policy,
www.stls.frb.org
The press release that contact Hillary Debenport at
announced the policy revision (314) 444-8488 or 1-800-333-
is available under the “Press 0810, ext. 44-8488.
 Fed itorial
Economic Forecasts:
Is It Possible to Predict the Future?
By William Poole, president and CEO, Federal Reserve Bank of St. Louis

Most economists have about as much confidence in economic forecasts

as they do in forecasts about their local weather.
Since Jan. 3, 2001, the Federal Open Market
Committee (FOMC) has cut the intended funds rate
11 times. During the January 2002 FOMC meeting,
the committee voted to keep the intended funds rate
the same. Although I cannot predict what our
economic future will look like, I can offer my own
perspective on where we are right now and how
we got here.
At the end of 2000, the consensus among policy-
makers was that our economy would slow down
during the first part of 2001. We expected the
slowdown would be a brief “V” shape—as plotted on
a graph—that would not end a decade of economic
expansion. As the year progressed, the slowdown did
materialize, and it lasted longer than we anticipated.
That “V” became a “U”; yet, as of late August 2001,
forecasters continued to project near-term recovery
without a recession.
All bets were off starting Sept. 11. That day’s
tragedies were unprecedented, and forecasters had
no historical basis from which they could base their
projections about our economic future.
Failure to predict the economy’s turning point,
or even realize for several months that a peak has
occurred, is typical. Clearly, our economy was not
performing well before the attacks. Many consider-
ations were important factors. As the growth rate
slowed in 2000, businesses sharply reduced their
investments, and inventories grew substantially. In
2001, businesses cut investment further and liquidated
inventories. On the flip side, new car and home sales
flourished. Therefore, it is impossible to know
whether we would have had an official recession had
the attacks never happened.
What does the future look like? I can’t offer a specific
forecast. My personal conviction is that our current
economy contains powerful forces that will promote
growth and full employment. We have strong, resilient
people, efficient markets and low inflation.
Most economists agree that if our central bank does
not achieve price stability, no one else can. I define
price stability as an environment in which the inflation
rate, when properly measured and averaged over
several years, is zero. Achieving price stability—as I
define it—will yield a highly stable economy. I believe
we cannot be so aggressive in our efforts to stabilize
the economy that we run the risk of compromising
the goal of price stability.
The long-run goals of the Fed are clear. When it is
necessary, we are ready to cut or raise the intended
funds rate. Likewise, when the available information
does not indicate that a change is warranted, the Fed
is prepared to wait patiently until the appropriate
action becomes clear.

The Proposed Check Truncation Act

E very year, approximately
50 billion checks are written,
and each night millions of checks
are processed and transported
for presentment to paying banks
across the country. Financial
institutions expend significant
economic resources in collecting
Banking, Housing and Urban
Affairs. The proposed Check
Truncation Act is designed to
foster innovation and create
greater efficiency in the payments
system by reducing some of the
legal impediments to check
truncation that exist under
and returning checks, which would
reduce the industry’s reliance on
transportation to move checks
across the nation.
For more information on this
important draft legislation—including
a message from Greenspan and a
section-by-section analysis of the
2

and returning these checks. current law. proposed law—visit the Federal
On Dec. 17, 2001, Federal At this time, the proposed act has Reserve’s Board of Governor’s
www.stls.frb.org

Reserve Chairman Alan Greenspan not been introduced to Congress. web site:www.federalreserve.gov/
forwarded a legislative proposal If enacted, the act would enable paymentsystems/truncation/
to senator Paul S. Sarbanes, the banks to expand their use of default.htm.
chairman of the Committee on electronic methods in collecting
The USA Patriot Act Creates New Duties
T he USA Patriot Act was enacted some six weeks after the tragic
terrorist attacks of Sept. 11. The Patriot Act places new or expanded
responsibilities on financial institutions, especially those doing business
with foreign financial institutions. One purpose of the act is to “prevent,
detect, and prosecute international money laundering and the financing of
terrorism.” The intent is to foster greater cooperation among the banking
industry, regulators and law enforcement agencies.
The Patriot Act’s definition of financial institutions is broad. It includes
securities and commodities dealers and brokers, money transmitters, loan
and finance companies, and real estate settlement companies. Some of
the act’s provisions apply to all financial institutions, while others are more
limited in scope. Regardless, all financial institutions should anticipate
extensive rulemaking. Note: Some provisions will take effect on a given
date even if no rules have been issued.
Is This “Know Your Customer” Revisited?
Not necessarily. “Know Your Customer” was far more reaching because
it would have required financial institutions to verify their customers’
identities and document specific details about their customers’ businesses.
With the new Patriot Act, the secretary of the Treasury is required only to
establish minimum documentation standards. Financial institutions must
verify their customers’ identities, maintain records and consult government
lists of terrorists and terrorist organizations. Those regulations are
required to be in place by Oct. 26, 2002.
The Bank Secrecy Act Amendments and General Provisions
The Bank Secrecy Act is the core of U.S. money-laundering efforts.
While its anti-laundering requirements are not new for banks, they may
be new to other financial institutions.
Establish Programs: Because the Patriot Act mandates that all financial
institutions establish anti-money laundering programs, some bank holding
companies will need to export their bank secrecy programs to their
subsidiaries. These programs must include formal policies and procedures,
appointment of a compliance officer, ongoing employee training and
independent audits. After consulting with appropriate regulators, the Treasury
secretary may set minimum standards for the programs and exempt certain
institutions. The section’s provisions will become effective this April.
Expanded Protection: If the government receives a voluntary report of a
potential violation of the Bank Secrecy Act, financial institutions will be given
expanded protection from civil liability to their customers. Additionally, an
insured institution is protected, theoretically, if in good faith it discloses facts
related to a Bank Secrecy Act violation in a written employment reference
requested by another insured financial institution.
Acquisitions and Mergers: One new statutory requirement is that the
primary federal regulator, when acting on an application to acquire or merge
banks under the Bank Holding Company Act (BHCA) or the Federal Deposit
Insurance Act (FDIA), is required to take into consideration a company’s
effectiveness in combating money laundering.
Increased Penalties: A separate section increases civil and criminal penalties
for certain money-laundering violations to at least twice the amount of the
transaction, up to a limit of $1 million.
How Will This Affect International Money Laundering?
Effective Dec. 25, 2001, U.S. financial institutions cannot have
correspondent accounts for foreign shell banks. The Treasury’s
implementing rules (published Dec. 28, 2001) define correspondent
accounts very broadly to include every imaginable kind of account. The
provision applies to securities brokers as well as to depository institutions.
The Treasury is particularly interested in industry comments on its
definition of these accounts.
Every U.S. financial institution that has correspondent accounts or private
banking accounts maintained in the United States for non-U.S. customers
must establish special due diligence procedures for opening and maintaining
foreign accounts, and for detecting and reporting money laundering.
Minimum standards also are set for enhanced due diligence on the
correspondent accounts of foreign banks operating under an offshore banking
license or under a license issued by a country designated as “non-cooperative
with international money laundering principles.” These standards become
effective this July, even if the implementing regulations have not been issued.
3
The Patriot Act also includes a number of other provisions designed to
prevent terrorist organizations from using the U.S. financial system without
www.stls.frb.org
detection or punishment. While many of the financial institutions that the
Federal Reserve supervises have robust compliance programs, the recent
tragedy illustrates the importance of due diligence.
RegionalRoundup
Louisville Gears Up
for Check Standardization
In April, Louisville will be the
first office in the Eighth District
to move to Check Standardiza-
tion, a project that will convert
check processing platforms at
each of the Federal Reserve’s
45 sites to a standard, centrally
managed platform. Conversions
at the three remaining District
offices will occur throughout the
spring and summer.
Check Standardization is a
Federal Reserve infrastructure
change that will be largely
transparent to financial
institutions. However, bankers
will notice a few changes—
primarily on some printed
outputs—after their local Fed
office converts.
For a sneak preview of some
post-conversion changes, visit
www.stls.frb.org/banking/
financial.html. Then select the
“Check Standardization” link.
Eighth District Announces
Changes to Boards of Directors
The Federal Reserve Bank
of St. Louis has announced the
following new board members:
• Lewis F. Mallory Jr., chairman
and CEO of National Bank of
Commerce in Starkville, Miss.,
elected to a three-year term at
the St. Louis board.
• David H. Brooks, chairman
and CEO of Stock Yards Bank
& Trust Co., appointed to a
three-year term at the Louisville
Branch board.
• Cornelius A. Martin,
president and CEO of Martin
Management Group in Bowling
Green, Ky., appointed to a
three-year term at the Louisville
Branch board.
• Thomas W. Smith, president
and CEO of Ephraim McDowell
Health in Danville, Ky.,
appointed to fill the unexpired
portion of a three-year term at
the Louisville Branch board.
• Tom A. Wright, chairman,
president and CEO of Enterprise
National Bank in Memphis,
Tenn., appointed to fill the
unexpired portion of a three-
year term at the Memphis
Branch board.
OUT FOR
COMMENT
The following is a Federal Reserve
System proposal currently out
for comment:
On Jan. 23, the Federal Reserve
System’s Board of Governors
approved regulatory changes
intended to improve the quality
and consistency of Home Mortgage
Disclosure Act (HMDA) data. The
amendments take effect for data
collection beginning Jan.1, 2003.
The Board is requesting public
comment on the proposal to set the
thresholds for reporting the annual
percentage rate on first-lien and
subordinate-lien loans. The Board
also seeks comment on requiring
lenders to ask telephone applicants
their race, ethnicity and sex. Also
adopted were a number of clarifying
and technical changes, in addition to
reorganizing Regulation C to make it
easier to use.
Federal Register notices are located
at: www.federalreserve.gov/
boarddocs/press/boardacts/2002
Direct all comments to: Jennifer
Johnson, Secretary, Board of
Governors of the Federal Reserve
System, 20th St. and Constitution
Ave., N.W., Washington, D.C. 20551.
Seasonal Credit
Is Available for
Community Banks
T he Federal Reserve offers
seasonal credit to qualifying
community banks to help them
meet their local customers’
seasonal needs. Community
banks that experience yearly
fluctuations in their deposits and
loans—caused by construction
or farming operations, college
or resort activities, municipal
financing and other types of
seasonal business—frequently
can qualify.
To qualify, a financial
institution must:
• be under $500 million in
deposits and in sound financial
condition,
• meet the general requirements
for the program, and
• complete a brief application
that includes monthly deposit
and loan data.
There is no commitment fee
or stock purchase required.
Likewise, banks do not need
to be Federal Reserve members
to be eligible for the program.
Once approved, banks can
use their credit lines as a
primary seasonal funding source
or as a market-based rate on
all outstanding loans that are
secured to our satisfaction.
Credit may be drawn down
incrementally, as needed, and
partial and full prepayments are
allowed without penalty.
The seasonal credit program
is a safe, sound, flexible and
affordable way to meet a
community’s peak seasonal
funding requirements. If you
have any questions or would
like an application or program
brochure, please contact anyone
in the Credit Office. Those
numbers are (314) 444-8316,
4
444-8769 and 444-8622 or 1-
800-333-0810, extensions 44-
www.stls.frb.org
8316, 44-8769 and 44-8622.
 stock market and on monetary policy rules has inspired a
natural question: Should the Fed also react to equity price
movements when it makes monetary policy decisions?
Some analysts have argued that such a reaction sometimes
occurs. For example, the federal funds rate declined in
2001 as the returns on the DJIA fell. This episode along
with some of the history can be seen in the chart, which
plots the federal funds rate and the percentage change in the
James B. Bullard is an assistant vice president and senior DJIA from 1990 to 2001.
economist, and Charles M. Hokayem is a research analyst We suggest that the Fed not react to equity price
at the Federal Reserve Bank of St. Louis. Look for more
information on this topic in an upcoming issue of Review.
developments because it would be similar to looking in a
mirror. Stock market prices already reflect the actions the
Fed is taking to influence inflation and output. Here’s why:
Why the Fed Let’s begin with the idea that investors expect to get the
same returns from bonds as they do from stocks—once one
Should Ignore the takes into account that stocks tend to be riskier. For our
purposes, let’s assume that the risk premium for stocks is
Stock Market unchanging over time. If expected bond returns change
up or down, then investors will reallocate their portfolios
During the 1990s, stock price between stocks and bonds until their expected returns—net
movements were extraordinary. At of risk—are again equal.
the beginning of 1994, the Dow Because bond prices are connected with short-term nominal
Jones Industrial Average (DJIA) was interest rates, whenever the Fed changes short-term nominal
about 3,800; as of this writing interest rates, bond prices also change. Likewise, when bond
(February 2002), the DJIA hovers prices change, so do stock prices. In other words, Fed policy
around 10,000 but is down about changes cause a readjustment in all asset prices: short-term
1,000 points from the peaks that interest rates, bond prices and equity prices. Therefore, to
occurred during late 1999 and early turn around and argue that the Fed should react (again) to
2000. These movements have changing stock prices is somewhat circular.
sparked a great deal of discussion One might ask, “What would happen if the level of equity
among policy-makers, academic prices were included in a Taylor-type monetary policy rule?”
economists and the financial press To keep equity prices relatively constant, the discussion given
about the role the
stock market should
play in influencing
monetary policy
decisions.
During the recent
stock-market
gyrations, there has
been resurgent
interest in rules that
monetary policy-
makers can follow
when they adjust
short-term nominal
interest rates.
These rules, based on the work of above suggests that nominal interest rates should not move at
Taylor (1993), typically call for the all. But this conflicts with the basic idea behind the Taylor
Fed to adjust the intended federal rule, which calls for movements in nominal interest rates to
funds rate in response to two factors: stabilize output and inflation.
(1) the deviation of inflation from a In summary, if policy-makers include equity prices in the
target rate of inflation, and (2) the policy rule, it will only interfere with the Fed’s job of
performance of the real economy stabilizing inflation and output. This is why we think the
5

relative to a historical benchmark. Fed should ignore the stock market when making decisions
Taylor argued that such a rule would about monetary policy.
www.stls.frb.org

best keep inflation low and stable,

and simultaneously keep the Reference
economy on a steady growth path. Taylor, John B. “Discretion vs. Policy Rules in Practice.” Carnegie-Rochester Conference
All the recent attention on the Series on Public Policy, 1993, 39, pp. 195-214.

FedFacts
Community Affairs Produces
Two New Publications
The St. Louis Fed’s Community Affairs
Department has released its latest installment
of “Perspectives on Credit Scoring and Fair
Mortgage Lending.” This brochure—the
fourth of a five-part series—explores staff
training and data accuracy. The first four
installments, together with an introduction
and folder for the series of credit scoring
articles, are available now. The remaining
installment, “Overrides and Second Review
Process,” is under development and should
be distributed within the next few months.
Coming up with the money for affordable
housing, job training, downtown revitalization
and other community development projects
is hard. To make it easier, our Community
Affairs Department has produced a self-study
guide, “Community Development Financing:
Coming Up With the Money.” The guide is
designed for employees at banks, nonprofits
and government agencies who are new to
community development.
To order hard copies of these publications,
contact Linda Aubuchon at (314) 444-8646 or
toll-free at 1-800-333-0810, ext. 44-8646.
P.O. Box 442
St. Louis, Mo. 63166
Editor: Alice C. Dames
(314) 444-8593
alice.c.dames@stls.frb.org
Central Banker is published
quarterly by the Public Affairs
Department of the Federal
Reserve Bank of St. Louis.
Views expressed are not
necessarily official opinions
of the Federal Reserve
System or the Federal
Reserve Bank of St. Louis.
CalendarEvents
UPCOMING FED-SPONSORED EVENTS
FOR EIGHTH DISTRICT
DEPOSITORY INSTITUTIONS
You may also access the credit-scoring brochures
on line at www.stls.frb.org/caffairs/index.html.
Community Investments Roundtable
Fed Introduces Two Accounting MAY 22—MEMPHIS
and Billing Applications For more information, contact Ellen Eubank
at (901) 579-2421
This spring, financial institutions will be able
to access two web-based accounting applications
District Dialogues
nationwide. They are Account Management
The schedule through July 2002 is as follows:
Information and Service Charge Information.
APRIL 3—MEMPHIS, TENN.
The Account Management Information APRIL 4—JACKSON, TENN.
system will allow customers to have real-time JULY 16—BOWLING GREEN, KY.
access to their accounting activity and let JULY 17—LOUISVILLE, KY.
them “drill down” from summary totals to
For more information, contact Jill Dorries at
detail-level transactions. The Service Charge (314) 444-8818 or 1-800-333-0810,
Information application—formerly referred ext. 44-8818.
to as Data Access System for Billing—will
provide customers with online access to their
monthly billing statement and allow them to
download billing data for their internal use.
Prior to application rollout, customers will
receive product information and a self-guided,
computer-based training CD. Information
sessions also will be offered to District
customers following implementation. For
more information on these two applications,
contact Ranada Williams at (314) 444-8343
or 1-800-333-0869, ext. 44-8343.